Liability & Indemnity Clause

Each party must protect itself against any risk arising from a transaction. Two specific clauses which are often negotiated by parties are liability and indemnity clauses. A liability clause deals with consequences for failure to perform the contract. The clause defines the scope and limits of each parties’ liability. On the other hand, an indemnity clause deals with compensation for any losses, damages or liabilities suffered or incurred by one contracting party arising out of or in connection with the breach of the contract by the other contracting party.

The purpose of these clauses, among others, is to manage, allocate and mitigate risks as well as remedy and recourse of the contracting parties. These clauses must both align and be read together to avoid any discrepancies.

• Liability Clause referred in a Case

In Clearpath Marketing Sdn Bhd v Malayan Banking [2017] MLJU 369, the liability clause in question is as follows:

“I / We hereby agree that in no event will the Bank be liable for any lost profits, loss of business, loss of use, loss of goodwill, lost savings or other consequential, special, incidental, indirect, exemplary or punitive damages suffered by me / us by reason of any delay in performance or non-performance of any obligations of the Bank whether arising from any negligence, breach of these terms and conditions or howsoever.

Notwithstanding anything to the contrary in these terms or conditions, the Bank’s total liability hereunder however arising shall be limited to actual direct loss suffered by me / us (provided the same is supported by documentary evidence submitted by me / us to the Bank) which shall not exceed RM500.00 for all claims.”

This clause concerns the liability of the bank for any performance or non-performance on the bank’s obligations. The first part of the clause relieves the bank from being held liable for any consequential or indirect damages. The second part of the clause, on the other hand, limits the bank’s liability to RM500.00 for all claims, meaning that the bank will not be liable for more than RM500.00 for all claims. As is apparent this clause is aimed at limiting the other party’s claim against the bank and thereby safeguarding the bank from potential claims and damages.

• Indemnity Clause referred in a Case

In SWM Greentech Sdn Bhd & Anor v Ketua Pengarah Jabatan Pengurusan Sisa Pepejal Negara & Anor [2020] MLJU 2460, the indemnity clause referred to are as follows:

“Indemnity 13.4 The Government hereby agrees and undertakes to indemnify, protect and hold the Operator harmless from and against any loss, damage, expense, claim, fine, penalty, demand or liability for pollution or contamination arising out of or connected with the operations under this Agreement where such pollution or contamination is a result (whether directly or indirectly) or any Deficiencies, inclement weather or otherwise caused by any other design and/or structural defect in the Facility, save and except where the Operator through its willful default, omission or gross negligence caused or otherwise materially contributed to the occurrence of such pollution or contamination.”

This clause covers the government’s responsibility to indemnify the operator for any design and/or structural defect to the landfill site. Nevertheless, this clause excludes the government’s responsibility to indemnify any design and/or structural defect due to the willful default, omission or gross negligence of the operator.

• Case Studies

A Federal Court case looking into the liability clause is CIMB Bank Bhd v Anthony Lawrence Bourke & Anor [2019] 2 MLJ 1, FC (distd). The Respondent sued the Appellant on breach of contract for failing to pay progressive payments to the housing developer and purchaser. The bank relied on the following clause:

Notwithstanding anything to the contrary, in no event will the measure of damages payable by the Bank to the borrower for any loss or damage incurred by the Borrower include, nor will the Bank be liable for, any amounts for loss of income or profit or savings, or any indirect, incidental consequential exemplary punitive or special damages of the Borrower, even if the Bank had been advised of the possibility of such loss or damages in advance, and all such loss and damages are expressly disclaimed.

This clause restricted the Respondent from taking any legal action against the Appellant for any negligence or breach of contract caused by the Appellant. The Respondent argued that the clause was void as it has contravened Section 29 of the Contracts Act 1950. The Federal Court upheld the decision of the Court of Appeal and held that any liability clause excluding a party to enforce their right to sue is void under Section 29 of the Contracts Act 1950. The Respondent had the right to sue the Appellant for damages under a suit for breach of contract or negligence.

A case concerning an indemnity clause is Malayan Banking Bhd v Basarudin bin Ahmad Khan [2007] 1 MLJ 613. The Respondent was sued for several breaches of his contractual duties employed by the Appellant. The question posed was:

‘In a contract that contains a promise by a party (the promisor) to indemnify the other party (the promisee) for loss if there is a breach of the contract by the promisor, whether the promisee has a right to sue the promisor either for breach of contract or on the indemnity, if there is breach of the contract by the promisor’

The Federal Court differentiated between a claim under an indemnity clause and the right of a party to claim for a breach of contract. An indemnity clause is a right from the original contract but such clause does not stop a party from taking action against another to claim for damages due to breach of contract. The court held:

By contrast, indemnity is a right which has to be provided for in the original bargain between the parties. It is a formal legal acceptance of responsibility for damage or loss. Indemnity springs from contract express or implied(see P Ramanatha Aiyur’s The Law Lexicon(2nd Ed)). As stated earlier indemnity and damages as incidence to breach of contract or tortious act are not synonymous but distinct. On the above analysis, therefore, the fact that the agreement provides for indemnity, that alone, in the absence of any express or implied term in the agreement taking away the appellant’s right for damages, in our view, would not prevent the appellant from making a claim for damages for breach of contract. In short, the indemnity clause as contained in the service agreement in the present case does not take away the right of action for damages for breach of contract: the s 74 (1) right.

• Conclusion

Liability and indemnity clauses are crucial clauses in forming a contract. These clauses must be carefully negotiated by the parties to protect each of their interest in the transaction.